A media release on Friday sheds more light on these planned initiatives by the government to supplement the current interest income exemption with tax free savings accounts:
This paper lays the basis for the legislation that will be published for public comment by July 2014, and for tabling and enactment thereafter in the newly-elected Parliament before the end of the year.
After taking into account comments received on the discussion document titled “Incentivising non-retirement savings” published in October 2012, government will proceed with the implementation of the tax free saving accounts. This document incorporates revisions to the original proposal based on comments received and from subsequent consultations. It also provides an outline of the administrative requirements and procedures for these accounts.
Most comments supported the establishment of a tax free savings proposal. Many comments were received on the proposal to abolish the interest income exemption. The revised proposal now retains the current interest income exemptions, but it is not intended that the exemptions increase with inflation. This approach should allow a sufficient time for individuals to restructure their financial affairs. (It was initially proposed that this incentive should be done away with, but was retained after industry input).
Individuals will be allowed to open one or two accounts, where they may invest in either interest bearing or equity instruments or both types of investments in each account, but total contributions for the tax year may not exceed the annual limit, initially to be R30 000.
Unnecessary withdrawals will be discouraged by not permitting replacement of withdrawn amounts. A lifetime limit of R500 000 will also apply.
Institutions that have a banking, or collective investment scheme licence, as well as government, will automatically be eligible to offer products through the tax free savings accounts. Stockbrokers that are registered with the Financial Services Board (FSB) and the Johannesburg Stock Exchange (JSE) will also be eligible to provide investment products through a tax free savings account, provided that products offered comply with the stated principles and characteristics.
Not all market savings or investment products may be appropriate for inclusion in these tax free savings accounts. Most collective investment schemes are the typical type of investment to be included in the tax free savings accounts, along with bank savings accounts, fixed deposits, retail savings bonds, REITs and insurance investment products that meet the stated principles.
In order to ensure that customers are treated fairly, this document seeks to outline a set of principles and characteristics that products should abide by. These include simplicity, transparency and suitability. Direct share purchases will not be allowed although most exchange traded funds (ETFs) will qualify.
Products with contractual periodic contribution obligations (such as insurance contracts) or excessively high early termination charges are not considered appropriate. National Treasury and FSB will engage with industry in determining a reasonable early termination charge.
Taxpayers will be responsible for managing their overall yearly contributions to remain within the prevailing limit. Two options to ensure adherence to the annual contribution limits are explored.
Comments on the paper Non-retirement savings: tax free savings accounts may be submitted by 30 April 2014, to Mr Chris Axelson, Director: Personal Income Taxes and Savings, Economic Tax Analysis, Private Bag X115, Pretoria, 0001 or by fax to 012 315 5516 or by email to: firstname.lastname@example.org.
Click here to download the document containing more detailed information.